June 20, 2006
Securities and Exchange Commission
100 F. Street, N.E.
Washington, D.C. 20549-7010
Re: AAON, Inc.
Form 10-K for fiscal year Ended December 31, 2005
Forms 10-Q for the Fiscal Quarter Ended March 31, 2006
File No. 000-18953
Attention: Ms. Nili N. Shah
Branch Chief
Dear Ms. Shah,
This letter is in response to your letter dated May 25, 2006.
Form 10-K for Fiscal Year Ended December 31, 2005
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Note 1. Business, Summary of Significant Accounting Policies and Other
Financial Data
Warranties, page 35
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1. Response: In future filings of Form 10-K, we will separately present the
amount of the provision recorded that represents the aggregate changes in the
warranty liability for accruals related to preexisting warranties (including
adjustments related to changes in estimates) for each of the years presented in
accordance with the paragraph 14b of FIN 45. The presentation of the rollforward
of warranty activity will be as follows:
2004 2005 2006
---- ---- ----
Balance, beginning of period
Payments made
Warranties issued
Changes related to preexisting warranties
Balance, end of period
If such information is required to be presented on an interim basis pursuant to
Rule 10-01(a)(5) of Regulation S-X, the Company will provide the required
disclosure in interim financial statements to be filed on Form 10-Q.
(1)
Segments, page 38
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2. Response: The Company manufactures and sells air-conditioning and heating
equipment. The Company has three operating divisions: AAON, Inc. ("AAON"), AAON
Coil Products, Inc. ("ACP"), and AAON Canada ("Canada"). AAON and Canada
manufacture heating, ventilation and air-conditioning (HVAC) units that are the
same type of product, can be interchangeable and often sold to the customer as
one product. A major part of the operations at the ACP plant are coils, which
are assembled with other parts in comprising a finished HVAC unit. The
production of coils is viewed simply as part of the process of making a finished
HVAC unit, similar to the fabrication of sheet metal parts used in the
production of final HVAC units.
We consider each of the three operating divisions "operating segments" as
defined in paragraph 10 of Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information"(SFAS 131).
However, we believe it is appropriate to aggregate the three operating segments
for reporting purposes in accordance with the provisions of paragraph 17 of SFAS
131. Paragraph 17 of SFAS 131 allows aggregation of operating segments if the
aggregation is consistent with the objective and basic principles of SFAS 131,
if the segments have similar economic characteristics, and if the segments are
similar in each of the following areas: (1) the nature of the products and
services, (2) the nature of the production process, (3) the type of class of
customer for the products, (4) the methods used to distribute the products, and
(5) if applicable, the nature of the regulatory environment.
We believe that the result of the referenced considerations are consistent and
are indicative of the same economic focus for AAON, ACP and Canada. The areas
listed in (1)-(5) above are similar for each of the three operating segments
because the products produced at the three segments are generally
interchangeable or used in the manufacturing process at one of the other
operating segments; the production process is similar in that similar raw
materials, fabrication methods, manufacturing processes, and the amount and
nature of the direct labor costs are similar across the segments; all segments
sell to the same customers using the same sales force; the distribution methods
are the same (sold to resellers or directly to end customers); and there are no
significant differences in the regulatory environments each segment operates in.
Pursuant to your request for historical operating data for each of our operating
segments, we submit the following analysis:
- ------------------------- ---------------------------------- ---------------------------------- ---------------------
2005 2004 2003
- ------------------------- ---------------------------------- ---------------------------------- ---------------------
AAON ACP CANADA AAON ACP CANADA AAON ACP
- ------------------------- ---------- ---------- ------------ ---------- ---------- ------------ ---------- ----------
Revenues 166,638 35,742 11,208 162,046 34,074 3,326 142,594 26,249
- ------------------------- ---------- ---------- ------------ ---------- ---------- ------------ ---------- ----------
Gross profits 30,144 7,064 (1,580) 24,970 2,872 (630) 31,969 3,820
- ------------------------- ---------- ---------- ------------ ---------- ---------- ------------ ---------- ----------
Gross profit margins 18.09% 19.76% (11.71%) 15.41% 8.43% (14.94%) 22.42% 14.55%
- ------------------------- ---------- ---------- ------------ ---------- ---------- ------------ ---------- ----------
Operating profits 16,637 3,940 (2,697) 12,216 612 (926) 18,707 2,181
- ------------------------- ---------- ---------- ------------ ---------- ---------- ------------ ---------- ----------
Operating profit margins 9.98% 11.02% (19.99%) 7.54% 1.80% (21.96%) 13.12% 8.31%
- ------------------------- ---------- ---------- ------------ ---------- ---------- ------------ ---------- ----------
(2)
In determining whether it would be appropriate to aggregate the three operating
segments into one reportable segment, we considered whether the similarity of
historical operating results met the requirement that the aggregated operating
segments have similar economic characteristics. We considered the following:
ACP - ACP's primary purpose is to provide component parts for completed
HVAC units produced at AAON and Canada. To that extent, ACP's business
is simply an extension of the AAON and Canada's operating segments. If
ACP has additional manufacturing capacity beyond the capacity required
to provide component parts for completed HVAC units produced at AAON
and Canada, then ACP will sell parts to third party customers. Those
outside sales have averaged only approximately 20-25% of ACP's total
sales for each of the three years in the period ended December 31,
2005. If AAON's or Canada's volume increased to the extent that ACP
would no longer be able to fulfill orders from outside customers and
meet the production requirements for AAON and Canada, then ACP would
reduce the sales to outside parties and focus only on supplying parts
to AAON and Canada.
Additionally, we did not consider it appropriate to rely solely on the
operating statistics of ACP when determining the appropriateness of
combining the ACP operating segment with the other two operating
segments of the Company as the pricing on inter-company sales is
established by the chief operating decision maker of the Company. The
total operating results of the ACP division are impacted primarily on
the prices that the chief operating decision maker sets for
inter-company sales.
Therefore, we considered it more appropriate to rely on the
similarities of the nature of the products sold, the nature of the
production process, the type of class of customer for the products, the
methods used to distribute the products and the similarity of the
regulatory environments in determining the appropriateness of combining
the ACP operating segment with the other operating segments to form one
reportable segment.
Canada - Canada was acquired in May, 2004 and has undergone significant
changes since the acquisition. The Company has done extensive
programming to accommodate the Canadian and U.S. Dollar conversion of
reports, a manufacturing standard cost system has been implemented, a
formalized system to schedule jobs into production, and production line
enhancements. The Company has begun, but has not yet completed, the
integration of certain pricing methodologies utilized by AAON and ACP
due to the backlog of existing contracts at the acquisition date and
the time spent by management integrating the business. Although
Canada's gross margins and gross margin percentage were significantly
lower than AAON's and ACP's during 2004 and 2005, management expects
the margins to be consistent with AAON and ACP's margins in the future
and that the three operating segments have essentially the same future
prospects once the appropriate pricing methodologies are fully
implemented. Our long term strategic plan predicts that Canada's
margins will be consistent with our expectations about future margins
at AAON and ACP. The above table shows improvements in Canada's
operating results during 2005 as compared to 2004 and we continue to
see improvements in Canada's operating results during the first part of
2006.
(3)
However, because our plan to improve Canada's operating results had not
been completed by the end of 2005, we believed it was appropriate to
highlight disclosure of Canada's results of operations in the
management discussion and analysis section of our 10-K and in quarterly
press releases issued during 2005 to highlight the impact the recent
acquisition of Canada had on the operating results of the Company.
We will continue monitoring the results of Canada to determine that our
expectation that the Canada operating segment display similar future
economic characteristics as our other operating segments is an
appropriate assumption. If our expectation changes, we will present
Canada as a separate reporting segment in the future.
With respect to the various products offered by the three operating segments,
the Company manufactures various sizes of HVAC equipment with various features.
For tracking and monitoring purposes, the various sizes of equipment are
assigned unique product numbers. However, the products are not dissimilar and
are manufactured, sold and distributed in similar manners and to the same
customers. Additionally, each product has a similar ratio of planned material,
labor, and overhead costs and the actual amounts of those costs tend to vary
only with the size of the product ordered. In addition, AAON, ACP, and Canada
each have a separate senior management person that oversees management, sales,
and engineering performance for each location. We considered all of the above
factors, including the nature of the similarities of the product lines, when
determining our operating segments and determined that the three operating
divisions described above were more consistent with the objectives and basic
principles of SFAS 131 related to operating segments rather than our various
product lines.
Norman H. Asbjornson, President and Chief Executive Officer, is the chief
operating decision maker as defined by SFAS No. 131. In that role, Mr.
Asbjornson regularly reviews the results of operations of each operating
segment, gross margin reports, and consolidated financial information. As noted
below, the type of information reviewed and used by Mr. Asbjornson in evaluating
segment performance and determining appropriate resource allocations is being
provided under separate cover.
In connection with responding to your comments, the Company acknowledges that:
o The Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
o Staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
o The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
As requested, we are submitting December 31, 2005, and March 31, 2006 internal
gross profit reports and financial statements for AAON, ACP and Canada that are
regularly provided to the Chief Executive Officer. These reports are hard copy
reports that cannot be reproduced and downloaded into a document format that can
be Edgarized, so we are sending hard copy reports via overnight delivery service
to the attention of Melissa N. Rocha, Division of Corporate Finance.
(4)
If the staff has any further comments or questions, please feel free to contact
the undersigned. We would further ask that you provide a copy of any additional
comments or questions to our General Counsel, John B. Johnson, Esq., at Johnson,
Jones, Dornblaser, Coffman & Shorb, Suite 2200, Bank of America Center, Tulsa,
Oklahoma, 74119.
Sincerely,
/s/ Kathy I. Sheffield
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Kathy I. Sheffield
Vice President/Treasurer
(5)